MISCOUNSELING

MISCOUNSELING, CONSUMER CREDIT COUNSELORS

by Doug Korty

Many of the new credit counseling organizations are known for unethical practices and for being phony nonprofits. However, even the traditional “CCCSs” or Consumer Credit Counseling Services have serious conflicts of interest. They receive a percentage of the payments that clients make to creditors; this makes them collection agencies. Some of their counseling is useful but much of it is biased by their self interest. The director of an agency told me, "We never use the word “bankruptcy’”. Many of the CCCS counselors are well-meaning, but they are pressured by their agencies to put too many people on repayment plans.

Creditors, including the Bank of America, started the CCCS movement, calling it “an alternative to bankruptcy”. For many years the CCCS organizations had a monopoly on "credit counseling". Their percentage of client payments or “Fair Share” was originally as much as 15%. They became unusually profitable nonprofits. CCCS organizations dominated the industry until mid 1990s, but now have only about 1/3 of the clients enrolled in plans. In 1990, 202 out of 225 credit counseling agencies were CCCSs; by 2000 only 175 out of 800 were. This competition hurt profitability and threatened the existence of some. The new competitors like Genus, Cambridge, Pro Fina, Ameridebt, often charge exorbitant fees and hold client money rather than making timely payments. They operate primarily by phone and internet, and give little or no real counseling. Since 1993, the total number of clients on plans has increased tenfold, and suspicious creditors have lowered Fair Share, scrutinized applicants and tightened concession terms.  The decline in Fair Share has put additional strain on the CCCSs.

A surprisingly small percentage of CCCS clients are capable of repaying their debts. Most simply have too much debt relative to their income. About 20% make at least one payment, but only 5% finish a plan. Bankruptcy is the best and often the only option for the great majority of clients. CCCS counselors do little to assist or educate clients concerning bankruptcy. Because of this, many clients lose their houses or cars or become unable to afford a bankruptcy attorney. Even for clients who can fulfill a repayment plan, Chapter 13 bankruptcy is usually a better option because some of the debt can be written off and all or most of the interest charges eliminated instead of only reduced slightly with a plan.

Job loss, reduced income, medical expenses and usurious interest rates and fees on credit cards cause the majority of serious credit problems. Medical expenses lead to one half of U.S. bankruptcies. Most clients come to CCCS only after they are in serious trouble and are being harassed by creditors. Stress makes them vulnerable and more likely to trust a counselor. The counseling sessions are usually quite brief and perfunctory, lasting 90 minutes max. The focus is on specific debts and setting up the plan. The analysis of a client's expenses, in spite of its importance, tends to be especially crude, based on rough estimates rather than on detailed analyses of actual financial records. Expenses are systematically under-estimated, this encourages clients to agree to unrealistic repayment plans -- hence the low retention rates.

Agencies can still prosper. If a client has $60,000 in debt, he would pay on average $90,000 in payments over 4 or 5 years including interest. A Fair Share average of 10% would be $9,000. Only five percent of clients complete plans. But another 15% begin plans and make some payments that yield substantial income for the agency. In one year a full-time counselor can bring in over $175,000 for an agency. H.R. 975, the Bankruptcy Abuse Prevention and Consumer Protection Act, went into effect in 2003. One of the provisions of this law makes it compulsory for debtors to obtain a certificate of contact with credit counselor and complete a financial education course. This is a huge new revenue source for the industry and increases the number of people beginning unrealistic plans.

People with debt trouble need honest counseling, especially about bankruptcy. A serious conflict of interest distorts the way credit counselors "counsel and educate" their clients. CCCS and other organizations start far too many clients on debt repayment plans and fail to help most clients understand or use other options -- bankruptcy, refinancing and settlements. Consumer groups and self-help organizations need to provide advice and information and attack the credit industry’s aggressive marketing, usurious fees and interest rates and unfair practices. They should avoid partnerships with creditors. Combining the roles of collection agent and counselor is fundamentally unethical.

SOURCES

Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time by Stephen Elias, Robin Leonard, Nolo, 2008

Credit Repair (book with CD-Rom) by Robin Leonard , John Lamb, Nolo, 2007

How to File for Chapter 7 Bankruptcy by Stephen Elias , et al., Nolo, 2008

Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom (11 th edition) by Robin Leonard , John C. Lamb, Nolo, 2007

The Foreclosure Survival Guide: Keep Your House or Walk Away With Money in Your Pocket by Stephen Elias, Nolo, 2008

The New Bankruptcy: Will It Work for You? (2nd edition) by Stephen Elias, Nolo, 2007

http://www.halt.org/,

http://www.lawhelp.org/,

http://www.nolo.com/